I am a securities law attorney at Wiand Guerra King in Tampa, Florida, where my practice includes complex commercial litigation and regulatory matters, with a focus on securities and financial services litigation. I am also part of the team representing the court-appointed receiver of Arthur Nadel's $400 million Ponzi scheme, and have particular expertise in the area of Ponzi schemes. In addition to my law degree, I also hold a Masters in Business Administration from the University of Miami. In my spare time, I also publish the Ponzitracker blog, which tracks the proliferation of Ponzi schemes both nationally and internationally. Feel free to follow on Twitter at @Ponzitracker. All opinions expressed are solely that of the Author. This blog is not intended, nor should it be construed, as legal advice.

SEC: To Fund Insider-Trading Scheme, Oregon Men Sold Car, Took Out Loan From Peer-to-Peer Lending Site

The Securities and Exchange Commission (“SEC”) filed a lawsuit against two Oregon IT specialists, accusing them of violating federal securities laws by trading on inside information of their company’s impending merger with a competitor. After Blake Wellington, 46, and Daniel Vance, 40, learned of confidential merger negotiations while troubleshooting a problem on their CEO’s computer, the two men sold personal possessions and even obtained a loan from a peer-to-peer lending site to buy thousands of company shares. When the merger was announced shortly after, the shares skyrocketed 150% in value and netted the two tens of thousands of dollars in profits. Without admitting or denying the charges, Wellington and Vance have agreed to a consent judgment in which they will pay over $150,000 in disgorgement of their ill-gotten gains, along with prejudgment interest and civil monetary penalties.

The Scheme

The two men worked as information technology specialists at Clear One Health Plans, Inc. (“ClearOne”), an Oregon health insurance provider. One day in December 2009, Vance was summoned to the company CEO’s office, who was having difficulties sending several email attachments. The attachments contained highly confidential information about a possible merger with ClearOne competitor PacificSource Health Plans (“Pacific Source”), including a deal timeline and media talking points. After working on the issue, Vance solved the problem.

Later that day, Vance relayed his discovery to his supervisor, Wellington, whereafter both men quickly began accumulating shares through a series of what the SEC described as “unusual steps.” For example, Wellington borrowed $4,000 from his 401(k) account and opened a credit card solely to write a $10,000 convenience check to purchase ClearOne shares. Additionally, he applied for a loan from an online peer-to-peer lending site, telling potential lenders that

”I have an opportunity to invest in a corporation with a GREAT price to book ratio. I estimate that I will be able to pay the loan completely off within 3 to 6 months.”

Wellington ultimately received a $25,000 loan – all of which was used to purchase ClearOne shares.

Vance took equally unusual fundraising steps, also borrowing money from his retirement account, as well as selling personal computer equipment and his truck to finance the share purchases. Both would eventually purchase thousands of shares at prices ranging from $9.75 to $10.50 per share.

Sure enough, ClearOne issued a press release after markets had closed on December 30, 2009, announcing its acquisition by PacificSource for $26.00 per share – a 150% premium to the shares’ recent trading range. The two men began selling their shares the following day for handsome profits, with Wellington and Vance pocketing trading gains of $55,891.50 and $17,509.75, respectively.

Takeaways

Several points of interest stand out in this case. First, a closer look at the complaint against Wellington and Vance suggests that the men might have caught wind of the impending merger earlier than alleged. Indeed, the complaint disclosed that the ClearOne Board of Directors had held a conference call on October 16, 2009, to discuss a potential acquisition by PacificSource. The next trading day, October 19, 2009, Wellington opened a trading account and began buying shares, as did Vance shortly thereafter. However, the men were charged only for the trades made after discovering the emails on the CEO’s computer, which occurred two months later on December 16, 2009. While the timing is uncanny, the discrepancy may never be explained.

Second, while few would dispute that insider trading has become a top priority for the SEC, which brought a record amount of insider-trading enforcement actions in 2012, the amount of realized gains in this case rank among the lowest in recent memory. To put the numbers in perspective, Raj Rajaratnam received a record 11-year prison term after being convicted of using inside information to book profits of more than $72 million. The move should serve as a chilling example to those who might rationalize their illegal conduct by minimizing their exposure.

Finally, the unlikely sources of funds used to purchase the shares also suggest that Vance and Wellington were keen on avoiding raising red flags by perhaps making large purchases on margin or contacting a bank for a loan. Indeed, each would have paid above-average interest rates by obtaining a peer-to-peer loan or credit card cash advance, as well as incurred possible tax penalties through 401(k) withdrawals. However, the steps could not hide the fact that Vance and Wellington, neither of whom had ever purchased ClearOne shares before, accumulated large numbers of shares in the period leading up to the announcement and then immediately sold those holdings immediately after the announcement.

The Financial Industry Regulatory Authority (“FINRA”), which the SEC acknowledged had participated in the investigation, often examines the trading activity of a company’s shares surrounding a major announcement and employs sophisticated computer programs designed to spot suspicious transactions. Based on the facts of this case, it is likely that FINRA initiated an investigation and passed along its findings to the SEC. While FINRA has historically played a key role in combating insider trading, the SEC recently unveiled plans to develop a centralized database that would store information on every single trade order, execution, and cancellation across across numerous equity and options trading markets. Such a move could allow the SEC to move quicker and more efficiently on suspicious activity, as well as bring together various sources of information that may be cross-referenced and analyzed in ways previously not possible.

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